Professional Documents
Culture Documents
First-time
Adoption of
Ind AS
Contents
Overview of Ind AS roadmap
06
10
42
84
98
financial statements
Preface
The transition from Indian GAAP to Ind AS is a historic and
a landmark change. In accordance with its commitment
to G20, India is converging to IFRS in a phased manner
starting from annual periods beginning on or after 1 April
2016. The IFRS converged standards will be known as
Indian Accounting Standards (Ind-AS) and will contain
numerous carve outs from IFRS. The change to Ind AS is
a hugely positive move that will bring the accounting in
India substantially closer to the accounting followed by
the global companies under IFRS.
Due to carve outs, Indian companies may not be able to
make a dual statement of compliance with both Ind AS
and IASB IFRS. Therefore, Indian companies may not be
able to use Ind AS financial statements for global listing
purposes that require compliance with IFRS. However,
Indian companies may find it easier to prepare IFRS
financial statements from Ind AS financial statements
rather than Indian GAAP financial statements.
The application of Ind AS is more than a mere accounting
or technical exercise. The consequences are far wider
than financial reporting issues, and extend to various
significant business and regulatory matters including debt
covenants, dividend, managerial remuneration, ESOP,
minimum alternate tax (MAT), training of employees, IT
systems, internal control and taxation. A case in point is
infrastructure companies. They may have to pay higher
MAT, if MAT is based on Ind AS profits, because under
Ind AS, construction revenue and profits are recognized
upfront in a service concession arrangement. As a CBDT
committee is still examining these issues, companies
must engage with these agencies to put their concerns
at the forefront. It is imperative that companies identify
and address these and many other issues in their Ind AS
conversion project.
Ind AS conversion will not be a hassle-free job. At the
same time, with appropriate planning and an early start,
it may not be a hugely painful exercise. Experience tells
us that major European companies took about eighteen
months to two years to convert from national GAAP to
IFRS. Our recommendation to entities in phase 1 and 2,
that have not started the process of Ind AS conversion
is to start immediately. More importantly, there are no
disadvantages to getting a start on the process, but the
advantages include:
Overview of
Ind AS roadmap
Given below are salient features of Ind AS roadmap notified by the MCA:
2016-17
2015-16
April
March
April
March
Mandatory
Phase 1
Opening Balance Sheet
1 April 2015
Financial statements
for year ended
31 March 2017
Comparative for 31
March 2016
2017-18
2016-17
April
March
April
March
Mandatory
Phase 2
Opening Balance Sheet
1 April 2016
Comparative for 31
March 2017
Financial statements
for year ended
31 March 2018
Voluntary
Phase
Mandatory
Phase 1
Mandatory
Phase 2
1 January
2016
1 January
2017
1 January
2018
30 June
1 July 2015
1 July 2016
1 July 2017
30
September
1 October
2015
1 October
2016
1 October
2017
Revenue recognition
Key differences
Under Indian GAAP, revenue recognition is dealt with under
AS 9 Revenue Recognition and AS 7 Construction Contracts.
Ind AS 115 Revenue from Contracts with Customers is a
single standard which deals with revenue recognition in a
comprehensive manner under the Ind AS regime.
The application of Ind AS 115 will change the requirements
for recognizing revenue for most companies, particularly
for companies in the real estate and construction industry.
IFRS 15 Revenue from Contracts with Customers is effective
for IFRS reporting entities for the first interim period within
annual reporting periods beginning on or after 1 January
2017, and will allow early adoption. Unlike IFRS, Ind AS
requires immediate application of Ind AS 115 and does not
provide a choice between IAS 18 Revenue/IAS 11 Construction
Contracts and IFRS 15. This eliminates the need to convert
twice, i.e., applying IAS 18/IAS 11 on first time adoption and
later changing to IFRS 15 from 1 April 2017. Therefore, India
will probably be the first country to apply IFRS 15, without any
precedence or experience of its application in other countries.
This may not be the best outcome, considering that IFRS 15
requires application of a significant amount of judgment, and
there are many open interpretative issues that IASB and FASB
have to resolve. Pending unresolved issues, IASB has recently
proposed to defer the application of IFRS 15 for IFRS reporting
11
Disclosures
Extensive disclosures are required to provide increased insight
into both revenue that has been recognized, and revenue that is
expected to be recognized in the future from existing contracts.
Quantitative and qualitative information will be provided about
the significant judgments and changes in those judgments that
management made to determine revenue that is recorded.
Key impact
Control model
Ind AS 115 has introduced the control model to determine
the point of revenue recognition. Management needs to
determine, at contract inception, whether control of a good
or service transfers to a customer over time or at a point in
time. Arrangements where the performance obligations are
satisfied over time are not limited to services arrangements.
Complex assets or certain customized goods constructed for a
customer, such as a complex refinery or specialized machinery,
could also be transferred over time, depending on the facts and
circumstances. Revenue is recognized over time if prescribed
criteria are met. This model may have significant impact on
companies engaged in construction or real estate business.
Contracts
Performance obligations
Transaction price
Allocation
Recognition timing
Determining stand-alone
selling prices
Combining contracts
Identifying performance
obligations
Signicant nancing
component
Repurchase provisions
Contract modications
Service-type warranties
Non-cash consideration
Allocating attributable
variable consideration
Allocating attributable
discount
Established business
practices
Options granting a
material right
Payments to customers
Consignment arrangements
Changes in transaction
price
Customer acceptance
Determining legal
enforceability
Constraint
Licences
Bill-and-hold transactions
Financial instruments
Key differences
Derivatives
Equity
Fail
Pass
Fail
Hold-to-collect
contractual
cash ows
BM with objective
3
that results in
collecting contractual
cash ows and selling FA
Neither
(1) nor (2)
No
Yes
Amortised
cost
FVTOCI
(with recycling)
No
FVTOCI option
elected ?
Yes
No
No
Fail
FVTPL
FVTOCI
(no recycling)
1 IFRS 113 Fair Value Measurement consolidates fair value measurement guidance from across various IFRS into a single standard. It does not change when fair value
can or should be used.
Guide to First-time Adoption of Ind AS |
13
Yes
No
FVO used as per
criteria prescribed?
Yes
No
Incudes embedded
derivatives
Changes due to
own credit
Yes
No
Prot or loss
Host Debt
Amortized cost
OCI
Embedded
derivatives
15
if the net present value of the cash flows under the new
terms (including any fees paid net of any fees received)
discounted at the original EIR is at least 10% different
from the discounted present value of the remaining cash
flows of the original debt instrument. In addition, there
may be a situation where the modification of the debt is so
fundamental that immediate derecognition is appropriate
whether or not the 10% test is satisfied.
Key impact
Liability v. equity classification
Due to application of Ind AS 109, liability and equity
classifications of financial instruments may change substantially.
Some of the instruments, such as redeemable preference shares,
are classified as equity under the current Indian GAAP. Under Ind
AS, these may be identified as liabilities, either wholly or partly.
Similarly, on adoption of Ind AS, compound instruments will need
to be split between debt and equity component. Each portion is
then treated separately.
The accounting classification of an instrument as a liability or
equity is much more than an accounting matter or matter of
presentation in financial statements. Particularly, it may have
significant impact on reported financial performance of an
entity. For instance, if an instrument needs to be classified as
liability instead of equity, any return payable thereon will be
charged to profit or loss as expense, instead of distribution
of profit. Moreover, such change in classification will impact
key performance indicators such as debt-equity ratio, interest
coverage ratio, debt service ratio and earnings per share. This
in turn, is likely to impact decision making of stakeholders such
as financial institutions, investors, vendors, customers and tax
authorities. It could also result in non-compliance with debt
covenants, and could affect other amounts such as the number
or stock options to be granted or managerial remuneration to
be paid.
It is not necessary that Ind AS 32 will only have a negative
impact. Depending on the situation of each company and the
nature of instruments issued, the impact could either be positive
or negative. For example, certain reputed companies have issued
perpetual bonds to raise long-term financing. As the name
suggests, these bonds do not have any fixed maturity. These
bonds, therefore, give a comfort of equity to the issuer. At the
same time, the issuer, at its discretion, may redeem these bonds
at a later date. Based on the exact legal and contractual terms of
perpetual bonds, it may be possible to conclude that these bonds
are not liability for the issuer; rather, they are part of equity
under Ind AS. If so, the issuer will treat interest payable on these
bonds as the distribution of profit and debit the same directly to
equity. However, if the issuer is or may be required to pay cash
on these bonds, e.g., because the holder has a right to put these
bonds to the issuer, these will be treated as liability and interest
payable thereon will be treated as charge to profit or loss.
values than Indian GAAP. All financial assets and liabilities are
initially recognized in the balance sheet at fair value. In the case
of FVTPL assets, liabilities and derivatives (other than those used
for hedging) and subsequent changes in fair value are recognized
in profit or loss. The use of fair values is likely to cause volatility
in the statement of profit and loss or other comprehensive
income (OCI). To comply with Ind AS 109 requirement for fair
value measurements, entities will have to make use of valuation
methods and valuation professionals.
Impairment
Ind AS 109 requires a provision for impairment to be recognized
based on the ECL model . To determine impairment loss,
companies will need to consider information that is reasonably
available at the reporting date about past events, current
conditions and forecasts of future economic conditions. The
need to incorporate forward-looking information means that
application of Ind AS 109 will require considerable judgment as
to how changes in macroeconomic factors will affect ECL.
Moreover, the focus on expected losses is likely to result in
increased volatility in the amounts charged to profit or loss,
especially for financial institutions (once Ind AS becomes
applicable to them and from the group reporting perspective),
while the increased level of judgment required in making the
calculation may mean that it will be more difficult to compare the
reported results of different entities. However, the more detailed
disclosure requirements should provide greater transparency
over an entitys credit risk and provisioning processes.
Derecognition
Due to the application of Ind AS 109 derecognition requirements,
an entity may not be able to derecognize financial assets
transferred under the arrangements, such as, bill discounting
and/or factoring of trade receivables, in entirety, if it has provided
credit enhancement to the transferor. Rather, based on the
specific facts, the entity will evaluate whether it should treat
the transfer as a financing transaction (i.e., debt) or continuing
involvement approach will apply which requires the entity to
continue recognizing the transferred asset to the extent of its
continuing involvement.
Comprehensive disclosures
Ind AS 107 requires very comprehensive disclosures regarding
financial instruments and risks to which an entity is exposed,
as well as the policies for managing such risks. Comprehensive
information on the fair value of financial instruments would
enhance the transparency and accountability of financial
statements.
17
Business combinations
Key differences
Ind AS 103 specifically deals with accounting for preexisting relationships between acquirer and acquiree,
and for re-acquired rights by the acquirer in a business
combination. It requires a reacquired right/pre-existing
relationship to be recognized separately from the goodwill.
An indemnification asset is initially measured on the same
basis as the indemnified item, subject to the need for a
valuation allowance for uncollectible items.
Indian GAAP does not provide guidance for such
situations.
Ind AS 103 provides an option to measure any noncontrolling (minority) interest in an acquiree at its fair
value, or at the non-controlling interests proportionate
share of the acquirees net identifiable assets. The choice
of method is to be made for each business combination
on a transaction-by-transaction basis, rather than being a
policy choice.
Under Indian GAAP, AS 21 does not provide the first
option to measure non-controlling (minority) interest in an
acquiree at its fair value. It requires minority interest in a
subsidiary to be measured at the proportionate share of
book value of net assets.
Key impact
The changes brought in by Ind AS 103 are likely to affect
all stages of the acquisition process from planning to the
presentation of the post-deal results. The implications primarily
involve providing increased transparency and insight into
what has been acquired, and allowing the market to evaluate
the managements explanations of the rationale behind a
transaction.
Greater transparency
Significant new disclosures are required regarding the cost of
the acquisition, the values of the main classes of assets and
liabilities, and the justification for the amount allocated to
goodwill. All stakeholders will be able to evaluate the actual
worth of an acquisition and its impact on the future cash flow of
the entity.
19
Group accounts
Key differences
21
Joint ventures
Key impact
Changes in the group structure
Application of Ind AS 110 may significantly amend existing
group structures as companies may need to consolidate
additional subsidiaries based on criteria such as Defacto
control, structured entities and potential voting rights.
Moreover, some of the existing entities may get deconsolidated.
Companies will need to update their existing group structures
and start coordinating with new group entities so that they get
timely information for all entities to prepare CFS.
Changes in group structure, as mentioned above, along with
other Ind AS changes may significantly impact financial
performance and financial position. It is necessary that entities
start communicating such impacts to their stakeholders in
advance to avoid sudden impact. Moreover, companies may
need to renegotiate loan covenants based on their financial
performance and financial position under Ind AS.
Continuous assessment
Ind AS 110 requires control to be assessed on a continuous
basis. This is particularly relevant in marginal cases and may
have in, out and in situation from one period to the next. For
example, in case of Defacto control, a relatively small change
in the shareholding pattern of an investee company may fail
the control test. In subsequent periods, the entity may be able
to achieve Defacto control again. This will result in significantly
different numbers being used for consolidation.
Service concession
arrangements
Key differences
Under Indian GAAP, notified accounting standards do not deal
with accounting for service concession arrangements (SCAs).
In 2014, the ICAI has issued an exposure draft of the Guidance
note on Accounting for Service Concession Arrangements
by Concessionaires, which has not yet been finalized. In the
absence of authoritative guidance, differing practices seem to
have emerged to account for such arrangements and many
companies seem to have followed differing practices. For
instance, some companies have recognized infrastructure
asset as a fixed asset, while others have recognized it as an
intangible asset. Many companies do not recognize any revenue
and profits during the construction period.
23
Key impact
Impact on revenue
Classification of the arrangement into intangible or financial
asset under Ind AS will have a significant impact on the contract
revenues recognized. For example, accounting under the
intangible model would result in double the revenues compared
to a contract with nearly identical cash flows that is accounted
for using the financial asset model. Selection of the model to be
applied is not an option. Rather, the model flows from whether
the operator has the right to charge for services (intangible
model) or the right to receive cash flows from the grantor
(financial asset). This may require careful analysis, since a
contract that initially appears to fall within the intangible model
may have an element of guaranteed cash flows. For example,
if during early years of the contract, the government body
guarantees a minimum level of revenues from the operation of
a new expressway to encourage private investment, there may
be both a financial asset and an intangible asset.
2 Please also refer the booklet titled IFRS-converged Indian Accounting Standards Outreach meeting dated 15 January 2015, published by the Accounting Standards
Board of the ICAI.
Income taxes
Key differences
25
Key impact
Deferred tax accounting for the group
Under Indian GAAP, deferred taxes in the CFS are a simple
aggregation of the deferred tax recognized by various group
entities. On transition to Ind AS, deferred taxes in the CFS will
be significantly different from that under Indian GAAP. This is
because of GAAP differences explained above, especially with
respect to undistributed profits of subsidiaries, associates and
joint ventures and intra-group transactions.
Acquisitions
Deferred tax is recognized on fair value adjustment of acquired
assets, liabilities and contingent liabilities recorded as part of
business combination accounting. Goodwill under Ind AS is
determined accordingly. Reversal of deferred tax asset/liability
in future years affects the tax expense or income of those
years. Therefore, the effect of acquisition on deferred taxes in
future financial statements will differ significantly under Ind AS
and Indian GAAP.
27
Key impact
Reduced volatility in profit or loss
In the case of defined benefit plans, actuarial gains and losses
arise due to changes in actuarial assumptions, such as with
respect to discount rate, increase in salary, employee turnover,
mortality rate, etc. The requirement to account for actuarial
gains and losses in OCI will reduce volatility in the statement of
profit and loss.
29
Intangible assets
Investment property
Inventories
Impairment of assets
31
Key impact
Component accounting
Under Ind AS 16, a component of an item of PPE with a cost
that is significant in relation to total cost of the item will be
separately depreciated. Hence, entities will need to divide
the cost of an asset into significant parts, if their useful life
is different, and depreciate them separately. This will require
entities to restructure their fixed asset register and recompute
depreciation. Furthermore, the requirement of estimating
residual value is likely to change depreciation of many assets,
as Indian companies normally presume 5% of the value of assets
as their residual value, rather than making any estimate of the
residual value. It may be noted that component accounting is a
requirement under the Act also from financial years beginning
on or after 1 April 2015, and even companies that continue
to follow Indian GAAP will have to carry out component
accounting.
Intangible assets
Unlike Indian GAAP, amortization will not be required under
Ind AS for an intangible asset for which there is no foreseeable
limit on the period over which the asset is expected to generate
net cash inflow for the entity. However, annual impairment
testing will be required for such an asset. This can create
volatility in profit or loss. Moreover, the company will be able
to reflect intangible assets at their fair value, provided there is
an active market for them. This will help the company project
real value of their intangible assets in the balance sheet to their
stakeholders.
Provisions,
Contingent
Liabilities and
Contingent Assets
Key differences
Leases
Key differences
33
Key impact
Service contracts
Under Ind AS, an embedded lease may exist in sale/purchase/
service contracts entered by entities in any industry. Given
below are some contracts that are most susceptible to a lease
classification:
Assets and liabilities, both monetary and nonmonetary, should be translated at the closing rate.
Income and expense items should be translated at
exchange rates at the dates of the transactions.
All resulting exchange differences should be
recognized in OCI and accumulated in the foreign
currency translation reserve, until the disposal of the
net investment
Guide to First-time Adoption of Ind AS |
35
Key impact
Compliance with local laws
Ind AS recommends that the local statutory and tax
requirements should not be considered when determining the
functional currency. If an Indian company concludes that INR is
not its functional currency, it may need to use a dual currency
ledger to capture financial information in both the local
currency and the functional currency to comply with both local
tax and other laws, as well as Ind AS requirements.
First-time adoption
Ind AS 101 does not contain an exemption allowing a first-time
adopter to use a currency other than the functional currency
in determining the cost of assets and liabilities. Consequently,
a first-time adopter that measured transactions in a currency
that is not its functional currency will need to restate its
financial statements with retrospective effect. For a large entity
with numerous assets, this may be an onerous exercise as it
will affect the measurement of all non-monetary items in the
opening Ind AS balance sheet.
Presentation of
financial statements
Key differences
37
Key impacts
Consistency with the Companies Act
In the case of voluntary change in accounting policy, Ind
AS 8 requires that comparative amount appearing in the
current period financial statements should be restated. A
similar requirement also applies for correction of an error and
reclassification of previous period amounts. One may argue
that these requirements are not in sync with section 131(1) of
the Act dealing with voluntary revision of financial statements.
In accordance with the section, the directors of a company
may prepare revised financial statements only after obtaining
approval of the Tribunal.
Related party
disclosures
Key differences
39
Segment reporting
Key differences
Key impact
Entities will be required to reassess the list of related parties for
enhanced relationships, which is covered under the scope of
definition of related party in Ind AS 24.
It is noted that in the revised Clause 49, definition of the term
related party includes related parties according to applicable
accounting standards. Hence, on the application of Ind AS, the
approval requirements under the SEBI Clause 49 for related
party transactions will also get triggered for transactions with
related parties within the scope of Ind AS 24.
Entities will need to strengthen/change their reporting
processes and information technology systems to map new
related parties covered in Ind AS 24 and track transactions with
specific related parties.
Key impact
Identification of CODM
Reporting under Ind AS 108 is based on information furnished
to the CODM. The term CODM defines a function rather than an
individual with a specific title. The function of the CODM is to
allocate resources and assess operating results of the segments
of an entity. The CODM could either be an individual, such as
the chief executive officer, the chief operating officer, a group
of executives such as the board of directors or a management
committee. Entities should review their management structure
to identify the CODM.
Goodwill impairment
Ind AS 36 requires goodwill to be allocated to each CGU or
to groups of CGUs. The relevant CGU or group of CGUs must
represent the lowest level within the entity at which the
goodwill is monitored for internal management purposes,
and may not be larger than an operating segment. If different
segments are reported under Ind AS 108, than were reported
under AS 17, it follows that there will be differences between
the CGUs that make up an Ind AS 108 segment and those that
made up an AS 17 segment. As a result, the CGUs supporting
goodwill may no longer be in the same segment under Ind
AS 108 as under AS 17. It may, therefore, be necessary to
reallocate goodwill associated with CGUs that are affected by
the change from AS 17 to Ind AS 108. It is possible that this
reallocation of goodwill could expose CGUs for which the
carrying amount, including the allocated goodwill, exceeds the
recoverable amount, thereby, giving rise to an impairment loss.
Customer concentration
On adoption of Ind AS, entities will be required to furnish
a disclosure of customer concentration, which will enable
investors to assess risk faced by a company. The company will
have to compile information of revenue generated by each
customer to furnish disclosures required by Ind AS 108.
41
First-time adoption
of Ind AS
First-time adoption
challenges and
perspective
Although, entities regularly adopt new accounting standards
under Indian GAAP, adopting Ind AS which is an entirely
different basis of accounting poses a distinct set of problems.
Ind AS for the first time. Ind AS 101 provides the basis on
which an entity will convert its previous financial statements to
Ind AS. It prescribes ground rules and accounting policies to be
followed in an entitys first set of Ind AS financial statements,
and in preparation of its opening Ind AS balance sheet. The
opening Ind AS balance sheet serves as the starting point for
the future accounting under Ind AS.
Though Ind AS 101 goes some way to reduce the burden of
historical accounting information, it does not turn the transition
process into a hassle free job. Even under Ind AS 101, the
transition process may remain complex and time consuming for
many entities. It places demands on entities in areas such as
staff training, data collection, analysis of contracts and other
critical agreements, and new or modified information system
requirements.
There are several important decisions which need to be made
as part of Ind AS conversion. These decisions will affect the
amount of work required on Ind AS adoption as well as financial
results/financial position of a company both at the time of
conversion as well as in the post-conversion period. While there
are no right or wrong answers to the multitude of questions
which need to be addressed on the first-time adoption, it is
imperative that senior personnel of first-time adopters spend
the time necessary to understand which combination of
answers will yield the best result for their entity. Key choices to
be made include:
Overview of
Ind AS 101
Ind AS 101 is applicable to the first set of annual Ind AS
financial statements prepared by an entity and to each interim
financial report, if any, that it presents in accordance with
Ind AS 34 Interim Financial Reporting, for part of the period
covered by its first Ind AS financial statements.
The objective of Ind AS 101 is to ensure that an entitys first
Ind AS financial statements, and its interim financial reports
for part of the period covered by those financial statements,
contain high quality information that:
a) Is transparent for users and comparable over all periods
presented,
b) Provides a suitable starting point for accounting under Ind
AS, and
c) Can be generated at a cost that does not exceed benefits
to users.
Ind AS 101 prescribes the procedures that an entity is required
to follow while adopting Ind AS for the first time. The underlying
principle is that a first-time adopter should prepare financial
statements as if it had always applied Ind AS. However, it
establishes two types of departure from the principle of full
retrospective application of Ind AS:
43
Who is first-time
adopter?
Ind AS 101 defines the first Ind AS financial statements as
the first annual financial statements in which an entity adopts
Ind AS by an explicit and unreserved statement of compliance
with Ind AS notified under the Companies Act, 2013. The
decisive factor is whether or not the entity made that explicit
and unreserved statement of compliance with Ind AS.
Two interpretative issues that arise as a result of this
requirement are discussed below.
An entity complies with all Ind AS but does not make
an unreserved statement of compliance with Ind
AS. Will those statements be treated as first Ind AS
financial statements?
No, those financial statements will not be treated as
first Ind AS financial statements. This scenario may
lead to potential legal implications for companies
as compliance with Ind AS is mandatory for all
companies under the roadmap.
The entity does not comply with Ind AS but makes
an unreserved statement of compliance with Ind AS
(could be recognition, measurement or disclosure).
The auditors have qualified the financial statements
as not complying with Ind AS. Will those statements
be treated as first Ind AS financial statements?
Yes, these financial statements will be treated as first
Ind AS financial statements. In subsequent years, the
entity can make the appropriate changes by applying
Ind AS 8 Accounting Policies, Changes in Accounting
Estimates and Errors to correct the errors.
First-time adoption
timeline/key dates
Two terms are key to understand Ind AS 101:- reporting date
and transition date. The reporting date is the end of the latest
period covered by Ind AS financial statements or by an interim
financial report. The transition date is the beginning of the
earliest period for which an entity presents full comparative
information under Ind AS in its first Ind AS financial statements.
To illustrate, consider an Indian company with a March yearend has net worth greater than INR500 crores. The company
chooses not to use the early application choice and therefore
needs to apply Ind AS for the financial year beginning on or
after 1 April 2016. The companys first mandatory reporting
date under Ind AS will be 31 March 2017. In the financial
statements for the year ended 31 March 2017, it also needs
to present comparative Ind AS information for the year ended
31 March 2016. Consequently, its transition date to Ind AS
will be 1 April 2015. In other words, its first set of financial
statements will be for 1 April 2016 to 31 March 2017 with Ind
AS comparative information also provided for 1 April 2015 to
31 March 2016. The opening Ind AS balance sheet date will be
as of 1 April 2015.
Last financial
statements under
previous GAAP
Comparative
period
First Ind AS
reporting period
1/4/2014
1/4/2015
1/4/2016
31/03/2017
Date of transition to
Ind AS
Reporting date
Opening Ind AS
balance sheet
Ind AS reporting
period
45
Consistent application
of accounting policies
Ind AS 101 requires an entity to prepare and present an
opening Ind AS balance sheet at its transition date, i.e., 1 April
2015 in the above example. The opening Ind AS balance sheet
is the starting point for subsequent accounting under Ind AS.
Ind AS 101 requires a first-time adopter to use the same
accounting policies in its opening Ind AS balance sheet and for
all periods presented in its first Ind AS financial statements.
To achieve this, the entity should comply with each Ind AS
effective at the end of its first Ind AS reporting period, after
taking into account voluntary exemptions and mandatory
exceptions to the retrospective application of Ind AS.
The requirement to apply same accounting policies to all
periods prohibits a first-time adopter from applying previous
versions of standards that were effective at earlier dates.
This not only enhances comparability, but also gives users
comparative information based on Ind AS that are superior to
superseded versions of those standards and avoids unnecessary
costs. For similar reasons, Ind AS 101 also permits an entity to
apply a new Ind AS that is not yet mandatory if that standard
allows early application. After the standard is selected, it is
applied consistently throughout the periods presented.
Example 1
Background
The reporting date for FTA Limiteds first Ind AS financial
statements will be 31 March 2017. Therefore, its date
of transition to Ind AS is 1 April 2015. FTA presents
financial statements under Indian GAAP annually to 31
March each year up to, and including, 31 March 2016.
Application of requirements
FTA will be required to apply the Ind AS effective for
periods ending on 31 March 2017 in:
Previous GAAP
47
Departures from
full retrospective
application
Ind AS 101 establishes two types of departure from the
principle of full retrospective application of standards in force at
the end of the first Ind AS reporting period.
Mandatory exceptions
Ind AS 101 prohibits retrospective application of Ind AS 101 in
some areas, particularly where this would require judgments
by management about past conditions after the outcome of
a particular transaction is already known. The mandatory
exceptions in the standard cover the following situations:
Estimates
Embedded derivatives
Hedge accounting
Government loans
Non-controlling interests
Voluntary exemptions
In addition to mandatory exceptions, Ind AS 101 grants limited
voluntary exemptions from the general requirement of full
retrospective application of the standards in force at the end
of an entitys first Ind AS reporting period. These exemptions
relate to:
Business combination
Insurance contracts
Deemed cost
Leases
Severe hyperinflation
Joint arrangements
49
Non-financial assets
and liabilities
Deemed cost
Full retrospective application of Ind AS 16, Ind AS 38 and Ind
AS 40 to the items of property, plant and equipment (PPE),
intangible assets and investment property could be quite
onerous because:
A selection of properties
Part of a factory, or
Application of requirements
Management can apply the exemption to use fair value
as deemed cost to the PPE only. If the Indian GAAP
revaluation of PPE met the specified conditions, the fair
value of these assets calculated in accordance with Indian
GAAP can be used as deemed cost at the date of fair
valuation. The purchased patents and development projects
do not meet the criteria in Ind AS 38 for the revaluation of
intangible assets, since there is no active market.
51
Example 3: Practical issue in interaction with exemption for past business combinations
Background
In accordance with Ind AS 101, a first-time adopter may choose to restate all past business combinations or combinations
occurring after a chosen date. If a first-time adopter restates any business combination to comply with Ind AS 103
Business Combinations, it needs to restate all later business combinations.
Consider that an entity, whose date of transition to Ind AS is 1 April 2015, decides to use Ind AS 101 exemption for
continuing its PPE at previous GAAP carrying amount. The entity had acquired a subsidiary in 2013. The acquisition
constitutes a business combination under Ind AS 103. The entity also decides to use business combination exemption in a
manner to restate all combinations occurring after 1 January 2013. The relevant information regarding subsidiarys PPE at
1 April 2015 is given below:
Previous GAAP carrying value used for consolidation:
INR120 million
INR180 million
INR165 million
At what amount should the entity recognize the PPE of the subsidiary in its Ind AS opening balance sheet?
Application of requirements
There is an apparent conflict between the two exemptions. The exemption relating to business combination used by the
entity requires it to use the fair value of the PPE as of the acquisition date as cost to arrive at the transition date value.
Therefore, the entity should recognize the PPE of subsidiary at INR165 million. The PPE exemption requires that for all
items of PPE, the amount recognized in the Indian GAAP CFS will be carried forward, without any adjustment (except
decommissioning cost). Therefore, the entity should recognize the PPE of the subsidiary at INR120 million. There is a
conflict between the two exemptions. As a result of this conflict, three views seem possible: (a) PPE exemption will override
the business combination exemption, (b) business combination exemption will override the PPE exemption, or (c) the two
exemptions are not mutually exclusive and hence entities have a free choice on using either the PPE exemption or the
business combination exemption. Till the time the MCA or the ICAI provide any further guidance to resolve this issue, a
first-time adopter may be able to select one of these views as the accounting policy in preparing its opening Ind AS balance
sheet. The view once selected should not be changed.
53
INR1,400
Residual value
INR200
INR75
INR300
5.65%
INR58
INR100
INR131
Assume that FTA Limited is not accounting for decommissioning liability under Indian GAAP.
Application of requirements
Full retrospective application of Appendix A to Ind AS 16 will require FTA Limited to go back in time and account for each
revision of the decommissioning provision. Keeping in view practical difficulties, Ind AS 101 allows the following treatment
to be followed:
Recognize decommissioning liability based on discounted value
of revised liability on 1 April 2015, i.e.,
INR131
INR 100
= INR100 x 5/20 =
INR25
= INR100 25 =
INR75
Entry to be passed
Debit Plant
INR75
INR56
INR131
Leases
Land leases
Since AS 19 did not contain any specific guidance on
accounting for land leases, Indian entities were accounting for
such leases in different ways under Indian GAAP. In contrast, Ind
AS 17 requires a lease of land to be assessed as an operating or
finance lease, based on the same criteria that are applicable for
lease of other assets. Ind AS 17 also states that when a lease
includes both land and building elements, an entity assesses the
classification of each element as finance or an operating lease
separately in accordance with the criteria laid in the standard.
In determining whether the land element is an operating or a
finance lease, an important consideration is that land normally
has an indefinite economic life.
Ind AS 101 does not require Ind AS 17 to be applied
retrospectively to land leases and it allows a voluntary
exemption on the matter. In accordance with the exemption,
when a lease includes both land and building elements, a first
time adopter may assess the classification of each element as
finance or an operating lease at the date of transition to Ind AS
on the basis of facts and circumstances existing as at that date.
If there is any land lease newly classified as finance lease at the
transition date, which was classified differently under previous
GAAP, then the first time adopter may recognize assets and
liability at fair value on that date; and any difference between
those fair values is recognized in retained earnings.
55
3 Please also refer the booklet titled IFRS-converged Indian Accounting Standards Outreach meeting dated 15 January 2015, published by the
Accounting Standards Board of the ICAI.
Revenue
Ind AS 115 Revenue from Contracts with Customers sets-out
principles that an entity applies to report useful information
about the amount, timing, and uncertainty of revenue and cash
flows arising from its contracts to provide goods or services to
customers. The core principle requires an entity to recognize
revenue to depict the transfer of goods or services to customers
in an amount that reflects the consideration that it expects to
be entitled to in exchange for those goods or services.
Ind AS 115 is a significant change from current Indian GAAP.
Although it provides more detailed application guidance,
entities will need to use more judgment in applying its
requirements, in part, because the use of estimates is more
extensive. The potential changes to revenue recognition for
some entities may be significant.
Ind AS 101 gives voluntary exemption whereby a first-time
adopter may use one or more of the following practical
expedients when applying Ind AS 115 retrospectively:
1. For completed contracts, an entity need not restate contracts that
begin and end within the same annual reporting period.
2. For completed contracts that have variable consideration, an
entity may use the transaction price at the date the contract was
completed rather than estimating variable consideration amounts
in the comparative reporting periods, and
3. For all reporting periods presented before the beginning of
the first Ind AS reporting period, an entity need not disclose
the amount of the transaction price allocated to the remaining
performance obligations and an explanation of when the entity
expects to recognize that amount as revenue.
Business combinations
and consolidation
Accounting for business combinations under Ind AS is
significantly different from that required under Indian GAAP.
Retrospective application of Ind AS 103 to past business
combinations may not be practical in all cases. Consider that
an Indian company acquired a subsidiary almost 10 years
back. Under Indian GAAP, as required by AS 21 Consolidated
Financial Statements, the company recognized assets and
liabilities of the subsidiary at book value. To apply Ind AS 103
retrospectively, the parent company will need to go back in the
history and determine acquisition date fair values of assets and
liabilities of the subsidiary. Considering the long-period of time,
this may be impractical.
Against this background, besides deemed cost exemption
for PPE, business combinations exemption in Ind AS 101 is
probably the most significant exemption. It provides a first-time
adopter an exemption from restating business combinations
prior to its date of transition to Ind AS.
57
1/4/2015
1/4/2016
31/3/2017
Date of transition
to Ind AS
Beginning of
first Ind AS
reporting
Ind AS Reporting
date
Opening Ind AS
balance sheet
59
Property, plant and equipment INR400 (under Indian GAAP); on 1 September 2013: INR500 (under Indian GAAP)
Goodwill INR360
In the opening (consolidated) Ind AS balance sheet, FTA decides to use business combination exemption whereby it will
not restate the past combination. Accordingly, FTA:
Classifies the business combination as an acquisition by FTA, even if it would have qualified under Ind AS
103 as reverse acquisition by the subsidiary XYZ.
Does not adjust the accumulated amortization of goodwill under Indian GAAP. FTA tests goodwill for
impairment under Ind AS 36 and recognizes any resulting impairment loss.
Measures property, plant and equipment which require cost based measurement after acquisition at
carrying amount under Indian GAAP immediately after business combination as their deemed cost. The
asset will be stated at INR500 on 1 September 2013. The 1 April 2015 value is derived using Ind AS
accounting from 1 September 2013 to 31 March 2015 for PPE on the balance of INR500. FTA may use
further exemptions that are available for PPE at the transition date.
Measures FVTOCI investments at fair value of INR600 and adjusts the corresponding effect in equity as a
gain on investments (INR400).
Writes off unamortized VRS expenditure with a corresponding debit to retained earnings.
Tests assets for impairment, if there is any indication that identifiable assets are impaired, based on
conditions that existed at the date of transition to Ind AS.
61
63
Joint arrangements
Under Indian GAAP, AS 27 Financial Reporting of Interest in
Joint Ventures requires all joint ventures are classified into
three types, i.e.., jointly controlled assets, jointly controlled
operations and jointly controlled entities. An entitys interests
in jointly controlled assets/jointly controlled operations are
accounted for by recognizing its share of assets, liabilities,
revenue and expenses. Investment in a jointly controlled entity
is accounted for by using the proportionate consolidated
method.
Ind AS 111 Joint Arrangements classifies joint arrangements
into two types, i.e., joint ventures and joint operations.
An entitys interest in joint operation is accounted for by
recognizing its share of assets, liabilities, revenue and
expenses. Investment in a joint venture is accounted for by
using equity method.
On transition to Ind AS, a first time adopter is required to
reassess the classification of its joint arrangements (as either
joint ventures or joint operations) on the basis of Ind AS 111
criteria. Based on classification, a first time adopter may
typically have to transition from the proportionate consolidation
method applied under Indian GAAP to equity method under Ind
AS 111.
The following table provides a step-by-step process of transition from proportionate consolidation under the previous GAAP to the
equity method under Ind AS 111 on transition to Ind AS
Recognize investment
Measure investment
Include any goodwill arising upon acquisition allocated from CGUs, if necessary
Disclose amounts that were aggregated into the investment cost basis
65
Non-controlling interest
Ind AS 110 contains specific requirements with regard to
accounting for NCI. These requirements, among others, provide
that:
a) An entity attributes the profit or loss and each component
of OCI to the owners of the parent and NCI, even if this
results in the NCI having a deficit balance.
b) When the proportion of the equity held by NCI changes,
an entity adjusts the carrying amounts of the controlling
and non-controlling interests to reflect the changes
in their relative interests in the subsidiary. The entity
recognizes directly in equity any difference between the
amount by which the NCI are adjusted and the fair value
of the consideration paid or received directly in equity and
attributes it to the owners of the parent. Hence, no gain or
loss to be recognized in profit or loss arises in this case.
c) Ind AS 110 contains specific requirements on accounting
for a loss of control over a subsidiary, and the related
requirements to classify all assets and liabilities of that
subsidiary as held for sale.
Ind AS 101 contains a mandatory exception which requires that
a first-time adopter should apply the above three requirements
prospectively from its date of transition to Ind AS. However,
if a first-time adopter restates any business combination that
was completed prior to its date of transition to comply with
Ind AS 103, it must also apply Ind AS 110, including these
requirements, from that date onwards.
Financial instruments
Ind AS accounting for financial instruments is complex and
requires exercise of significant judgment/estimate. In most
cases, Indian entities may not have collected necessary
information to apply Ind AS accounting retrospectively.
Collection of past data at the transition date also may not be
practical or involve the use of hindsight which is not allowed
under Ind AS 101. To address these challenges, Ind AS 101
specified voluntary exemptions and mandatory exceptions
related to financial instruments accounting.
Exemptions/exceptions related to
classification of financial assets
Under Ind AS 109, all financial assets are classified into
three principal categories for measurement purposes. These
categories are amortized cost, fair value through other
comprehensive income (FVTOCI) and fair value through profit
or loss (FVTPL). Amortized cost measurement is applicable
only for debt instruments An entity may use FVTPL and
FVTOCI categories both for debt and equity instruments. The
classification depends on the following two criteria and options
elected by the entity:
Voluntary exemptions
Considering practical difficulties in applying Ind AS 109
classification requirements retrospectively, Ind AS 101 contains
the following voluntary exemptions:
a) Designation of financial asset as measured at fair value
through profit or loss (FVTPL): In accordance with Ind AS
109, an entity may designate a financial asset, which is a
debt instrument and otherwise meets amortized cost or
FVTOCI criteria, as at FVTPL. However, such designation
is allowed only if doing so reduces or eliminates a
measurement or recognition inconsistency (commonly
referred to as accounting mismatch). Ind AS 109 also
requires that an entity should apply accounting mismatch
criteria and decide whether to apply FVTPL designation on
the date of initial recognition of the financial asset.
A first-time adopter is allowed to designate a financial
asset as at FVTPL on the basis of facts and circumstances
existing at the date of transition to Ind AS. An entity
exercising this exemption needs to make certain additional
disclosures, i.e., fair value of financial assets so designated
at the date of designation and their classification and
carrying amount in the previous financial statements.
b) Designation of investment in equity instruments: Ind AS
109 allows an entity to make an irrevocable election to
designate an investment in an equity instrument not held
for trading as at FVTOCI, instead of FVTPL. It requires
such election to be made on initial recognition and cannot
be changed subsequently. A first-time adopter is allowed
to designate an investment in such an equity instrument
as at FVTOCI on the basis of facts and circumstances that
existed at the date of transition to Ind AS.
To illustrate, consider that an entity, on the date of its
transition, is holding certain equity investments for
strategic purposes. The entity can designate these equity
investments as at FVTOCI, without looking at its intention
on the date it acquired these investments.
67
Mandatory exception
Ind AS 101 also contains the following mandatory exception
related to classification of financial assets.
In accordance with Ind AS 109, a financial asset which is a
debt instrument is measured at amortized cost if it meets two
tests, i.e.., business model test and SPPI test, at the date of its
initial recognition. A first-time adopter must assess whether
a financial asset meets these test on the basis of facts and
circumstances existing at the date of transition to Ind AS.
The SPPI test in Ind AS 109 is based on the premise that
contractual cash flows give the holder a return which is in
line with a basic lending arrangement. However, if the
terms of contract contain features which may modify the
time value of money, the SPPI test is not met requiring the
entity to measure the entire debt instrument as at FVTPL.
To make passing of the SPPI test easier, Ind AS 109 contains
certain operational simplifications. For example, Ind AS 109
states that (a) modified time value of money element and/or
(b) prepayment feature in a debt instrument do not fail the
SPPI test if their impact is insignificant at the time of initial
recognition of the financial asset.
Ind AS 101 states that if a first-time adopter is unable to
assess these particular aspects about the nature of cash flows
on the basis of facts and circumstances at the time of initial
recognition of the financial asset, it will lose the benefit of
operational simplification designed to make passing the SPPI
test easier. In other words, if these features are present in
the asset and information about facts and circumstances that
existed at the time of initial recognition of the financial asset is
not available, the first-time adopter will assume that SPPI test
has failed.
69
71
Ind AS 101 requires that a first time adopter should measure all
derivatives at fair value on transition to Ind AS. Moreover, the
entity is required to eliminate deferred gains and losses arising
on derivatives that were reported in accordance with previous
GAAP as if they were assets or liabilities. The recognition
of resulting gain/loss is determined in accordance with the
mandatory exception laid down in Ind AS 101. The flowchart
presentation of the exception is as follows :
Yes
No
Yes
No
Did the entity designate a net
position as a hedged item in
accordance with previous GAAP
On transition
Fair value hedge
Cash ow hedge
If hedging instrument is no
longer outstanding, there is no
requirement to restate when
under previous GAAP its result
has been recognized in P&L
and not deferred.
No
After transition
Are the CONDITIONS for hedge
accounting in Ind AS 109 met?
Yes
Follow specic hedge
accounting guidance in
Ind AS 109
No
Yes
FTA recognizes mark-to-market loss on derivative in its profit or loss, without considering offsetting gain on the
hedged item. At the transition date, there is a cumulative gain on the hedged item, which is not recognized on
consideration of prudence.
(ii) FTA recognizes mark-to-market gain/loss on the forward contract in the Cash Flow Hedge Reserve. However, it has
not maintained detailed hedge documentation.
(iii) FTA has identified hedge relationship under Indian GAAP and it does not recognize gain/loss on the forward
contract since the same will be offset by loss/gain on the hedged item. At the date of transition to Ind AS, the
hedged item is still expected to occur.
(iv) FTA has identified hedge relationship under Indian GAAP and it does not recognize gain/loss on the forward
contract since the same will be offset by loss/gain on the hedged item. At the transition date, the hedged item is
not expected to occur.
In the first scenario, FTA has not identified hedge relationship under Indian GAAP. On the transition date, it will measure the
forward contract at its fair value and recognize resulting gain in the opening retained earnings. Hence, there is no change in
Indian GAAP accounting going forward also, except that FTA will also start recognizing gains immediately.
In the second scenario, though FTA has not maintained detailed hedge documentation, it has identified hedge relationship
under Indian GAAP. Moreover, the relationship is an eligible hedge relationship under Ind AS 109. Hence, in its opening
Ind AS balance sheet, FTA will recognize gain/loss on the forward contract, arising before the date of transition to Ind AS,
in the Cash Flow Hedge Reserve. FTA will reclassify this amount to P&L when the hedged item (i.e.., foreign currency sale)
impacts the profit or loss. Ind AS 101 is clear that after the date of transition to Ind AS, hedge accounting can be applied
prospectively only from the date the hedge relationship is fully designated and documented in accordance with Ind AS 109
requirements. Hence, if FTA wishes to continue applying hedge accounting after the date of transition to Ind AS, it must
complete designation and documentation of the hedge relationship on or before that date. FTA must also comply with
ongoing requirements related to hedge effectiveness, etc. If FTA does not comply with hedge accounting requirements of
Ind AS 109, it will compute fair value of the derivative contract at each reporting date and recognize gain/loss in profit or
loss immediately. However, the gain or loss in the cash flow hedge reserve as of the date of transition will continue to be
shown there and can be reclassified to P&L only when the hedged transaction occurs.
In third scenario, the same analysis as the second scenario applies both regard to accounting at the transition date as well
as accounting after the transition date. Consequently, FTA will recognize gain/- loss on the forward contract, arising on or
before the transition date, in the Cash Flow Hedge Reserve in its opening Ind AS balance sheet. Like the second scenario,
subsequent accounting also depends on whether FTA complies with Ind AS 109 hedge requirements.
In the fourth scenario, the hedged item is no longer expected to occur. Hence, it is a relationship of the type that does not
qualify for hedge accounting under Ind AS 109. Consequently, FTA should not reflect this hedging relationship in its opening
Ind AS balance sheet. Rather, FTA will recognize fair value gain/loss arising on the forward contract in the opening retained
earnings. Going forward, assume that FTA does not comply with hedge accounting requirements of Ind AS 109. Hence, FTA
will fair value the derivative contract at each reporting date and recognize gain/loss in profit or loss immediately.
73
75
Other miscellaneous
exemptions and
exceptions
Mandatory exception
Estimates
In preparing the opening Ind AS balance sheet and comparative
information in its first Ind AS financial statements, a first-time
adopter may have received new information about estimates
that it made for the same dates under previous GAAP. Ind AS
contains a mandatory exception which will not allow the use of
such new/additional information to change the previous GAAP
estimates. Ind AS 101 requires an entity to use estimates
under Ind AS that are consistent with the estimates made for
the same date under its previous GAAP after adjusting for
any difference in accounting policy unless there is objective
evidence that those estimates were in error.
Under Ind AS 101, an entity cannot apply hindsight and make
better estimates when it prepares its first Ind AS financial
statements. This also means that an entity is not allowed to
consider subsequent events that provide evidence of conditions
that existed at that date, but that came to light after the date its
previous GAAP financial statements were finalized.
An entity may receive information after the date of transition
to Ind AS about estimates that it had made under previous
GAAP. The entity should treat the receipt of such information
as non-adjusting event, in accordance with Ind AS 10 Events
after the Reporting Period. For example, assume that an entitys
date of transition to Ind AS is 1 April 2015 and new information
on 15 July 2015 requires the revision of an estimate made
in accordance with previous GAAP as at 31 March 2015. The
entity should not reflect that new information in its opening
Ind AS Balance Sheet (unless the estimates need adjustment
for any differences in accounting policies or there is objective
evidence that the estimates were in error). Instead, the entity
should reflect that new information in profit or loss (or, if
appropriate, other comprehensive income) for the year ended
31 March 2016.
No
Yes
Is there objective
evidence that the
estimate was an error?
Yes
Make estimate
reecting conditions
at the relevant date*
Yes
Use previous
GAAP estimate
No
Did the entity used
accounting policy
consistent with Ind-AS?
No
Adjust previous estimate
to reect differences in
accounting policies
*The relevant date is the date to which the estimate relates.
77
Voluntary exemptions
Share-based payments
Under Indian GAAP, the Guidance Note on Accounting For
Employee Share-based Payments permits an entity to use the
intrinsic value method as an alternate to the fair value method
for measuring an employee share-based payment. On transition
to Ind AS, all entities need to measure share-based payment
transactions using the fair value method only.
Under Ind AS 101, there is no exemption from recognizing
share-based payment transactions that have not yet vested
at the date of transition to Ind AS. The voluntary exemptions
in Ind AS 101 clarify that a first-time adopter is encouraged,
but not required, to apply Ind AS 102 to equity instruments
that vested before date of transition to Ind AS. However, if a
first-time adopter elects to apply Ind AS 102 to such equity
instruments, it may do so only if the entity has disclosed
publicly the fair value of those equity instruments, determined
at the measurement date, as defined in Ind AS 102.
Ind AS 101 requires that for all grants of equity instruments to
which Ind AS 102 has not been applied (e.g., equity instruments
vested but not settled before date of transition to Ind AS), a
first-time adopter must still make the principal disclosures
relating to the nature and extent of share-based payments
required by paragraphs 44 and 45 of Ind AS 102.
If a first-time adopter modifies the terms or conditions of a
grant of equity instruments to which Ind AS 102 has not been
applied, the entity is not required to apply paragraphs 2629
of Ind AS 102 if the modification occurred before the date of
transition to Ind AS.
A first-time adopter is encouraged, but not required, to apply
Ind AS 102 to liabilities arising from share-based payment
transactions that were settled before the date of transition to
Ind AS.
4 Please also refer the booklet titled IFRS-converged Indian Accounting Standards Outreach meeting dated 15 January 2015, published by the Accounting Standards
Board of the ICAI.
78 | Guide to First-time Adoption of Ind AS
79
Presentation and
disclosures
An entitys first Ind AS financial statements should include at
least three balance sheets, two statements of profit and loss,
two statements of cash flows and two statements of changes in
equity and related notes.
The first Ind AS financial statements should be presented in
accordance with the presentation and disclosure requirements
in Ind AS 1 Presentation of Financial Statements and other Ind
AS standards. In addition, the presentation and disclosures
in the financial statements should also comply with Schedule
III of the Companies Act, 2013. Ind AS 101 does not provide
exemptions from presentation and disclosure requirements in
other Ind AS.
31 March 2016
31March 2017
Yes
Yes
Yes
Yes
Yes
No
NA
Yes
Yes
NA
Yes
Yes
NA
Yes
Yes
NA
Yes
No
NA
Yes
No
Other disclosures
If applicable, the first Ind AS financial statements should also
disclose:
81
83
Ind AS conversion
challenges and
perspectives
Conversion to Ind AS is not just an accounting change. Rather,
Ind AS implementation effort is likely to impact functions
outside of the finance department, including IT, legal, sales,
marketing, human resources, investor relations and senior
management. In the section titled Key differences between Ind
AS and Indian GAAP, we have explained key financial reporting
impacts of transition to Ind AS. In this part, we will cover the
following:
85
It may be noted that ICDS are not tax neutral vis--vis the
current Indian GAAP and tax practices currently followed
and may give rise to litigation. For example, based on AS 7,
the current practice is to recognize any expected loss on a
construction contract as expense immediately. In contrast,
ICDS will require expected losses to be provided for using the
percentage of completion method.
mechanism of how this will work is not clear from the ICDS.
The transitional provisions are not always absolutely clear in
all cases. In the case of non-integral foreign operations, e.g.,
non-integral foreign branches, ICDS requires recognition of
gains and losses in the P&L (tax computation), rather than
accumulating them in a foreign currency translation reserve. It
is not absolutely clear from the transitional provision whether
the opening accumulated foreign currency translation reserve,
which could be a gain or loss, will be ignored or recognized in
the first transition year 2015-16. Since the amounts involved
will be huge, particularly for many banks, the interpretation of
this transitional provision will have a huge impact for those who
have not already considered the same in their tax computation
in past years.
We understand that a CBDT committee is examining these
issues. We recommend that companies must engage with these
agencies to put their concerns in the forefront. It is imperative
that companies identify and address these issues in a timely
manner
MAT impact
ICDS are meant for normal tax computation. Therefore, as
things stand now, ICDS has no impact on minimum alternate tax
(MAT) for corporate taxpayers, which will continue to be based
on book profit determined under current AS or Ind AS, as the
case may be.
The application of Ind AS will impact the calculation of book
profits. Adopting Ind AS book profits as a starting point for
computing MAT may have a significant impact on the MAT
liability. In our view, a key issue is likely to arise regarding the
payment of MAT on fair value gains recognized in the profit
and loss account. In the absence of realized gains, paying taxes
on such gains will strain companies cash flows. Moreover,
issues will arise with regard to gains/losses adjusted to retained
earnings in the opening Ind AS balance sheet in accordance
with Ind AS 101. It is not clear whether these adjustments will
be considered for MAT computation or they will permanently
avoid MAT implications.
We believe that the regulators will need to consider the pros
and cons of various approaches in deciding in final approach
to be followed. The issue may become far more complicated if
one were to consider that Ind AS is applicable on different dates
based on the specified criterias, and for some entities, Ind AS
does not apply. Overall, the Central Government through the
Central Board of Direct Taxes (CBDT) will have to play a highly
pro-active role to provide clarity and minimize the potential
areas of litigation.
87
IT impact
Information technology (IT) is likely to play a substantial role
in the process of converting to Ind AS. It is advisable not to
underestimate the time and effort the conversion process will
require, or the inherent potential risks. A well-planned process
is critical for converting successfully while controlling costs,
maintaining reporting integrity, and avoiding potential financial
restatements or other surprises.
The adoption of Ind AS requires changes in the recognition,
measurement and disclosure of many items in the financial
statements. Both financial and business systems need to
deliver the information required for compliance with Ind AS.
Accordingly, IT systems will need to be modified so that the
financial data produced conform to Ind AS. It is important to
note that such changes are not restricted to IT modules relating
to general ledger entries or sub-ledger entries, but also affect
applications such as asset management systems, financial
instruments and payroll systems. Our experience with global
IFRS conversions has shown there are four main drivers that
determine the scale of an IT project.
The main driver for system- and IT-related changes is how the
new accounting standards are to be applied. The impact will
be influenced by the existing financial reporting processes
and the industry in which an entity operates. For example, the
new reporting requirements regarding property, plant and
equipment will likely be far more difficult to implement if an
entity operates in a capital-intensive industry. Similarly, an
IT organization structure
Our experience with IFRS conversion shows us that the
structure of an IT function may have a significant impact on
the resources required to implement Ind AS. For example, if an
entity has a centralized IT function, a focused IT Ind AS project
team can probably make the required system or IT process
changes from a single location. However, if the IT function is
decentralized across multiple locations and business units,
the number of affected people, systems, business units and
processes could be significant. IT personnel would also need
some training to understand Ind AS requirements and their
impact on IT systems.
Application architecture
The general rule of thumb is simpler the application
architecture, easier would be the implementation. Typically,
conversion in a single-ERP environment is relatively
straightforward. Our experience shows that the complexity
and effort increase greatly if an entity has multiple ERPs or
customized applications supporting the financial processes.
89
Key considerations
for Ind AS conversion
project
The conversion to Ind AS presents potential opportunities that
companies may want to further examine and explore. Many
companies operate on a global scale and have competitors
that are not based out of India. Being able to provide financial
reports to investors and other interested parties based on the
same/similar accounting standards used by those peers may
increase the companys comparability with its peers.
Once the conversion commences, companies may want to
understand the financial reporting decisions being made
by their peers and other companies around exemptions/
relaxations given on first-time adoption. This will require
converting companies to share their thoughts and perspectives
on potential policies with each other. Notably, companies that
have already adopted IFRS in Europe, Australia or elsewhere
can provide useful information. Further, investors and market
analysts will also want to be aware of the choices that the
company is making and how these choices compare against the
ones made by the companys peers.
Some companies will realize that there is a significant
underlying opportunity in using the conversion project as a
means to drive other areas of change. For example, companies
may consider the conversion to Ind AS as an opportunity to
streamline accounting and reporting processes or to accelerate
the financial statement close process.
Along with opportunities, there are many potential risks also
attached with Ind AS conversion process. Conversion to Ind
AS will be one of the most fundamental changes in financial
reporting in the Indian history. The potentially pervasive nature
of the changes at the accounting, functional, transactional and
internal control levels also increases the risk of misstatement.
Further, the current financial reporting environment has little
tolerance for mistakes, and it will be important for all companies
to get the conversion right in the first time. Misstatements, as
well as missed reporting deadlines, present a significant risk to
companies that are converting.
91
Key areas to be
addressed during Ind
AS conversion
No two Ind AS conversion projects will ever be the same.
However, while the specific issues that the companies will
face during their conversion will vary widely because of all
the variables at play, the key areas that the management and
boards will need to address during the conversion should be
broadly similar.
1. Project launch and planning activities: The initial
decisions made during the project set-up phase tend to
be crucial for eventual project success. These decisions
include:
a) Creating a project management function to coordinate
project activity and monitor/report progress
b) Structuring the project team based on the results of the
impact assessment phase
c) Assigning sufficient resources to the project and
determining that the team comprises individuals with
appropriate skills to fulfil their responsibilities
2. Revision of accounting policies: Reassessing accounting
policies under Ind AS will be one of the most important
elements of the project because decisions made in this
area will drive many of the changes required throughout
the business and will have direct implications for the
future business results. For instance, accounting policy
decisions will affect data collection requirements, which,
in turn, will affect IT system requirements, business
processes to collect and record the data, internal control
systems covering data validity and functional resourcing
requirements. The tax-related effects of revisions of
accounting policies will also need to be addressed in the
conversion process. Audit committees and boards will need
to review and be comfortable with the policies selected by
management.
93
Issues identified
The tone from the top is an important driver of change. The board sponsorship of the
project is crucial.
Ind AS conversion
process
In an Ind AS conversion, an entity undertakes to change its
financial reporting from its current GAAP (Indian GAAP for
most Indian companies) to Ind AS. Obviously, differences
between the Indian GAAP treatment and Ind AS would be one
of the key inputs to the conversion process in case of Indian
companies. These differences may vary significantly from one
company to another depending on the industry and the current
accounting policies chosen under Indian GAAP. However, the
magnitude of an Ind AS conversion project will not depend
solely on the magnitude of the GAAP differences, but will be
influenced by other factors such as:
95
Program
execution
Work streams
Diagnostic
Design
and planning
The process
A sample methodology for conversion is shown above, which
management may consider for Ind AS conversion.
The methodology takes, as a starting point, the fact that an
Ind AS conversion project needs to address more than just
accounting issues and that a conversion project is sufficiently
complicated to warrant professional project management.
It is for these reasons that the methodology comprises
five phases, each of which deals with a specific part of the
conversion, and that throughout the project it recognizes five
different workstreams, each dealing with a specific aspect
of the conversion process. This is to facilitate involvement of
specialists on need basis. It is, however, important to recognize
that the phases can overlap one another and entities need
not wait for completion of one phase to end before beginning
another. Also, a clear breakdown of all the activities by
workstream is not always possible as a mandatory allocation of
activities by phase. Thus, this methodology should be tailored
according to project specificities, starting point and in place
project structure, etc.
Solution
development
Tax
Project management
Implementation
Post
implementation
Implementation
This phase involves roll out of solutions developed in the
previous phase. In this phase the company will conduct a
process of dry-run of financial statements to ensure that before
the reporting deadline, company is geared up to prepare Ind
AS financial statements. Post dry-run financial statements,
the company will roll-out final deliverables, i.e., the opening
Ind AS balance sheet and the first Ind AS financial statements.
All business and process solutions developed will also be
implemented to facilitate the company transition to the new
reporting framework.
Post-implementation
This phase involves an assessment of how various solutions
developed work in the implementation phase and the
identification of any issues in the operational model. These
issues are tackled in this phase to ensure successful on-going
functioning of systems and processes in Ind AS reporting
regime. On-going update training is also provided, to ensure
that companys personnel are updated with latest Ind AS
developments, and also changes are made in systems and
processes. Ind AS manuals will also need to be regularly
updated for changes in Ind AS.
Solution development
The objective of this phase is to identify solutions to various
issues identified in relation to accounting and reporting, tax,
business process and system changes. Typical outputs from
this phase comprise of Ind AS accounting manuals, group
reporting packages, Ind AS skeleton financial statements, group
accounting policies, technical papers on Ind AS accounting
issues, crystallizing the impact on current and deferred tax,
developing solutions for tax functions and identifying processes
which need to be re-designed, modified or developed.
97
Exemptions applied
99
Estimates
The estimates at 1 April 2015 and at 31 March 2016 are
consistent with those made for the same dates in accordance
with Indian GAAP (after adjustments to reflect any differences
in accounting policies) except for the items where application of
Indian GAAP did not require similar estimation. The estimates
used by the Group to present these amounts in accordance with
Ind AS reflect conditions at 1 April 2015 the date of transition
to Ind AS and as of 31 March 2016.
Hedge accounting
The Group uses derivative financial instruments, such as
forward currency contracts, interest rate swaps and forward
commodity contracts, to hedge its foreign currency risks,
interest rate risks and commodity price risks, respectively.
Under Indian GAAP, there is no mandatory standard that
deals comprehensively with hedge accounting. The group has
designated various economic hedges and applied economic
hedge accounting principles to avoid profit or loss mismatch.
All the hedges designated under Indian GAAP are of types
which qualify for hedge accounting in accordance with Ind AS
109 also. Moreover, the group, before the date of transition
to Ind AS, has designated a transaction as hedge and also
meets all the conditions for hedge accounting in Ind AS 109.
Consequently, the group continues to apply hedge accounting
after the date of transition to Ind AS.
Government loans
The Group has classified government loan received as a
financial liability in accordance with the principles of Ind AS
32. The Group has applied the requirements in Ind AS 109
prospectively to government loans existing at the date of
transition to Ind AS. Hence, the Group has not recognized the
corresponding benefit of the government loan at a belowmarket rate of interest as a government grant.
Indian GAAP
Adjustments
Ind AS
XXX
XXX
XXX
Other equity
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
Securities premium
Treasury shares
XXX
XXX
XXX
a, b, q
XXX
XXX
XXX
i, q
XXX
XXX
XXX
XXX
XXX
XXX
i, q
XXX
XXX
XXX
XXX
XXX
XXX
Non-controlling interests
XXX
XXX
XXX
Total equity
XXX
XXX
XXX
Retained earnings
Reserve representing unrealised gains/losses
Foreign currency translation reserve
Other reserve
Non-current liabilities
Financial Liabilities
Interest-bearing loans and borrowings
c, q
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
c, d
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
Other liabilities
XXX
XXX
XXX
XXX
XXX
XXX
(INR million)
Footnotes
Indian GAAP
Adjustments
Ind AS
XXX
XXX
XXX
c, d
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
Total liabilities
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
Prepayments
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
Current liabilities
Financial Liabilities
Interest-bearing loans and borrowings
Trade and other payables
Other current financial liabilities
Government grants
Deferred revenue/ Contract liability
Assets
Non-current assets
Property, plant and equipment
c, d, l, m
Investment properties
Intangible assets
Investment in an associate/ joint venture
c, d
Current assets
Inventories
Financial assets
Total assets
Indian GAAP
Adjustments
Ind AS
XXX
XXX
XXX
XXX
XXX
XXX
Treasury shares
Other equity
XXX
XXX
XXX
Retained earnings
a, b, q i, q
XXX
XXX
XXX
i, k
XXX
XXX
XXX
Other Reserve
i, q, k
XXX
XXX
XXX
XXX
XXX
XXX
Non-controlling interests
XXX
XXX
XXX
Total equity
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
Non-current liabilities
Financial liabilities
Interest-bearing loans and borrowings
c, q
c, d
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
(INR million)
Footnotes
Local GAAP
Adjustments
Ind AS
Current liabilities
Financial liabilities
Interest-bearing loans and borrowings
Trade and other payables
Other current financial liabilities
XXX
XXX
XXX
c, d
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
Government grants
Deferred revenue/ Contract liability
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
Assets
Non-current assets
Property, plant and equipment
c, d, l, m
Investment properties
XXX
XXX
XXX
Intangible assets
XXX
XXX
XXX
c, d
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
Current assets
Inventories
Financial assets
Trade and other receivables
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
Prepayments
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
Total assets
Group reconciliation of profit or loss for the year ended 31 March 2016
(INR million)
Footnotes Indian GAAP
Adjustments
Ind AS
Continuing operations
Sale of goods
XXX
XXX
XXX
Rendering of services
XXX
XXX
XXX
Rental income
XXX
XXX
XXX
XXX
XXX
XXX
Other income
XXX
XXX
XXX
Finance Income
XXX
XXX
XXX
Total Revenue
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
c, d
c, d
c, d, i,
XXX
XXX
XXX
c, d, m
XXX
XXX
XXX
XXX
XXX
XXX
c, d
XXX
XXX
XXX
Other expenses
c, d
XXX
XXX
XXX
c, d
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
(INR million)
Footnotes Indian GAAP
Adjustments
XXX
XXX
XXX
XXX
XXX
XXX
Tax expenses
XXX
XXX
XXX
Ind AS
Discontinued Operations
XXX
XXX
XXX
XXX
XXX
XXX
Attributable to:
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
Indian
GAAP
Adjustment
Ind AS
Land
Machine
Intangible asset
Inventories
(X)
Receivable
(X)
Total Assets
XXX
XX
XX
Current liabilities
(XX)
(X)
(XX)
(XX)
(X)
(XX)
Contingent liabilities
(X)
(X)
Total Liabilities
(XX)
(X)
(XX)
Net Assets
XX
XX
XX
Enterprise value
XX
XX
Goodwill
XX
XX
xxx
Goodwill
xxx
Credit
Non-Controlling interest
xx
xx
b) Goodwill amortization
Under Indian GAAP, goodwill was amortized on a straight line
basis over the economic life of the asset, subject to maximum
of 10 years. Under Ind AS, goodwill is not amortized but is
measured at cost less impairment losses. For the business
combinations restated according to Ind AS 103, the goodwill
amortization has been reversed retrospectively. For all other
part business combinations, goodwill under Indian GAAP as at
the transition date as adjusted for specific adjustments required
by Ind AS 101 has been used as carrying amount. After the
transition date, no goodwill is amortized; rather, it is tested for
impairment annually. The effect of the change is an increase
in equity as on 1 April 2015 of INR xxx millions, on 31 March
2016 of INR xxx millions and increase in profit before tax for
31 March 2016 by INR xx millions. The change has no tax effect
Guide to First-time Adoption of Ind AS | 107
c) Unconsolidated subsidiaries
Assets
Goodwill
Debit
Various assets and liabilities
xxx
Goodwill
xxx
Credit
Current Assets
Inventory
XX
Trade receivable
XX
XX
XX
XX
Total Assets
XXXX
Liabilities
Current Liabilities
Trade payable
XX
Provision
XX
Non-Current Liabilities
Non-Controlling interest
xx
xx
Amount
XX
XX
Net assets
XX
XX
Both under Indian GAAP and Ind AS, the Group recognized
costs related to its post-employment defined benefit plan on an
actuarial basis. Under Indian GAAP, the entire cost, including
actuarial gains and losses, are charged to profit or loss.
Under Ind AS, re-measurements (comprising actuarial gains
and losses, the effect of the asset ceiling, excluding amounts
included in net interest on the net defined benefit liability and
the return on plan assets excluding amounts included in net
interest on the net defined benefit liability) are recognized
immediately in the balance sheet with a corresponding debit or
credit to retained earnings through OCI.
j)
Share-based payments
r) Government grant
The Group has received an interest-free loan under the
development scheme from the government for INR xxx million.
Under the Indian GAAP, the Group has accounted for the loan
as liability and the carrying amount was INR xxx million at the
date of transition to Ind AS. The Group will apply Ind AS 109
to the measurement of such loan after 1 April 2015 (date of
Transition to Ind AS). Since the loan does not carry any interest
and is repayable at the amount recognized in the opening
balance sheet, no interest needs to be recognized on the loan.
s) Deferred tax
Indian GAAP requires deferred tax accounting using the income
statement approach, which focuses on differences between
taxable profits and accounting profits for the period. Ind AS 12
requires entities to account for deferred taxes using the balance
sheet approach, which focuses on temporary differences
between the carrying amount of an asset or liability in the
balance sheet and its tax base. The application of Ind AS 12
approach has resulted in recognition of deferred tax on new
temporary differences, which was not required under Indian
GAAP.
In addition, the various transitional adjustments lead to
different temporary differences. According to the accounting
policies, the Group has to account for such differences.
Deferred tax adjustments are recognized in correlation to the
underlying transaction either in retained earnings or a separate
component of equity.
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